Depreciation Method 8 - Financial Agreement
Depreciation Method 8 - Financial Agreement together with Associated Method 3 - Operating Lease is used for lessee accounting to support ASC 842 Financial Reporting Rules for Operational Leases.
Before you start
Before you start, you must meet these prerequisites:
- You must set the depreciation type in 'FA Depreciation Type. Open' (FAS050) with the parameter Reporting Type 3 - Financial Agreement.
- Connect the depreciation type in 'FA Type. Connect Depreciation Types' (FAS077) and 'Fixed Asset. Connect Depreciation Types' (FAS002). Select Depreciation Method 8 - Financial Agreement and the associated Depreciation Method 3 - Operating Lease.
- Set up an operating lease agreement line in 'Financial Agreement. Open Lines' (AGS101) that is connected to a financial agreement master in 'Financial Agreement. Open' (AGS100).
The new depreciation plan calculation is integrated with the leasing agreement through Lease Type 2 - Operating Lease. When the agreement is activated, the depreciation plan is automatically generated.
Examples
- Example 1
- Agreement start date: February 1, 2019
- Payment frequency: Monthly
- Payment date: 99 - End of each month
- Lease term: 24
- Discount rate: 7%
- Payment: 17,990.00 USD
When a proposal is created, a preliminary fixed asset is created, and the total net present value of the lease term is set as the acquisition cost or the Right of Use (ROU). In this example, the ROU or acquisition cost is 402,826.78 USD.
The periodic depreciation is then calculated by deducting the interest, which is calculated from the total lease liability minus the Net Present Value for the period, from the lease cost:- Period: 201902
- Payment: 17,900.00 USD
- ROU/Lease liability: 404,919.65 USD
- Net Present Value: 402,826.78 USD
- Interest: 2,092.87 USD
- Depreciation: 15,897.13 USD.
However, when an accelerated depreciation in 'FA Depreciation. Create Extraordinary' (FAS140) is posted on the fixed asset, the depreciation calculation divides equally over the number of remaining terms, or the option is automatically set to 2 - With Lower Amount each year.
- Example 2Continuing from Example 1, a new version is created for this agreement:
- Financial agreement version date: May 1, 2019
- Payment frequency: Monthly
- Payment date: 99 - End of each month
- Lease term: 36
- Discount rate: 8%
- Payment: 20,000.00 USD
When a new version is created for operational lease, the total acquisition cost is recomputed as the Right of Use (ROU) plus posted depreciation. ROU is the total net present value of the lease term based on the payment plan and the version date specified when creating the new version. The difference between the initial cost of the fixed asset and the ROU is recognized as the additional cost. This is the new calculation:- Period: 201905
- Payment: 20,000.00 USD
- ROU/Lease liability: 404,919.65 USD
- Net Present Value: 576,732.50 USD
- Interest: 3,883.58 USD
- Depreciation: 16,116.42 USD
- Posted depreciation: 47,584.16
- Total Acquisition Cost: 640,432.99
- Additional Cost: 237,606.21
If there is a difference between the new depreciation plan and the ROU, the variance is adjusted to the first open period.